By Gunter Deuber, RBI
“Do not fight the Fed” is considered a core motto on international financial markets and among professional market observers. In the current crisis, this applies equally to the ECB. The ECB’s action is currently seen by financial market players as sufficiently decisive and timely (e.g. rapid announcement of the flexible PEPP in March, its upping later on in June). This can be seen by the absence of major frictions on European financial markets and the solid external value of the euro at present. The latter market reaction is definitely supported by the EU crisis management in terms of providing a decisive fiscal response, leaving the ECB not as the only game in town. The rather successful overall crisis management of the EU and at the ECB also bodes well – even if not so strongly observed – to the Central and Southeastern European region (CE/SEE). The ECB has rolled out a decent stabilisation network – based on pre-cautionary swap and repo lines – in CE/SEE over the last weeks and months. The ECB signed swap and repo lines with Bulgaria, Croatia, Hungary, Romania, Serbia and Albania.
Two of these countries are now official euro candidates, and Western European banks have substantial market shares throughout these countries. Definitely, like we know it from the Fed swap lines are often flanking economic and/or political interests rather than being a purely philanthropical exercise. In this respect, the ECB’s involvement certainly has tangible European interests, whether political, economic and/or finance-related. In case of Croatia and Bulgaria cross-currency swap agreements enable the local regulator to borrow up to EUR 2 bn against collateral in local currency. The agreements shall be valid at least until end of 2020. A renewal shall be not a big deal given the guidance that the swap lines for both countries and euro candidates shall be maintained “as long as needed”. That said, the admission of both SEE countries to the euro area “waiting room” (ERM II) is also a political signal that the ECB in particular has overcome its previous scepticism in this context.
The Hungarian repo line is worth EUR 4 bn (valid until June 2021), the Romanian repo line limit is set somewhat higher at EUR 4.5 bn (valid until end 2020). With regards to Serbia and Albania, the respective central banks can receive EUR liquidity in exchange to EUR-denominated collateral under their repo lines. Both arrangements are valid until June 2021. The maximum borrowing cap for Serbia equals EUR 1 bn, in case of Albania the amount is set at EUR 400 mn. Also, here an extension should be possible in all cases if necessary.
Three times the GFC response in times of COVID-19
Currently, the regional ECB crisis response goes well beyond what we have seen in the context of the Global Financial Crisis (GFC) and following euro area crisis. Back then ECB was providing a swap line to Hungary (in the amount of EUR 5 bn), while the Swiss National Bank did the same to support Hungary plus Poland. On an interesting note, back then the Swedish and Danish National banks did provide support for EU members Estonia and Latvia. The total amount of explicit ECB support to the region amounted to some EUR 5 bn, while aggregation of the agreements listed above add up to close to EUR 14-15 bn. And the sums involved in this ECB commitment are not to be underestimated. In relation to economic output, this amounts to just under 3% of GDP, or 4% of banking sector assets and even up to 5% of total nominal foreign debt in EUR terms. Whereby swaps and repo lines are of course about quite different sizes, namely the hedging of short-term payment flows. And as far as short-term external debt (in the next 12-18 months) is concerned, the ECB lines for the CE/SEE countries probably cover almost 20% of these liabilities.
One could say that the ECB’s commitment to the region has almost tripled compared to previous crisis responses. More importantly, however, the ECB is also actively fulfilling its role as one of the most important global central banks in the immediate vicinity of the euro area. In this way, the ECB certainly also supports the use of the euro outside the euro area, promotes a positive perception of European institutions and, of course, also serves financial stability in the region. This benefits the countries and also the large cross-border Western European banks operating in the region.
Gunter Deuber is Head of Economics, Fixed Income and FX Research at Raiffeisen Bank International in Vienna and designated Head of Raiffeisen Research.